Self-Employed in Canada? Stop Paying Dental Bills with Personal Cash. The 'HSA' Tax Strategy That Saves You 45%
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| Self-Employed in Canada? |
If you are a business owner, consultant, or freelancer in Canada, you likely face a painful reality: You don't have a company benefits plan.
When you need a root canal ($1,200), braces for your child ($6,000), or laser eye surgery ($4,000), you pull out your personal credit card. You pay the bill with "after-tax" dollars—money that the CRA has already taxed.
This is a financial mistake.
There is a CRA-approved tool called a Health Spending Account (HSA)—also known as a Private Health Services Plan (PHSP)—that allows your corporation to pay these bills 100% tax-free. It is not a "loophole"; it is a legitimate tax strategy used by smart entrepreneurs.
The "After-Tax" Problem: You Are Paying Double
To understand the power of an HSA, you must first understand the pain of paying personally. Let’s look at the math for an Ontario entrepreneur earning $100,000+ (approx. 43% marginal tax rate in 2026).
❌ Scenario A: Paying Personally (The Wrong Way)
You have a $1,000 dental bill.
- To get $1,000 in your pocket, your company must pay you a salary of roughly $1,755.
- The CRA takes $755 in personal income tax.
- You are left with $1,000 to pay the dentist.
True Cost to Business: $1,755.
✅ Scenario B: Paying with an HSA (The Smart Way)
You submit the $1,000 dental bill to your HSA provider.
- Your company pays the $1,000 bill + a 10% administration fee ($100).
- The total $1,100 is a 100% Tax-Deductible Business Expense.
- You (the employee) receive the reimbursement Tax-Free.
True Cost to Business: $1,100.
👉 THE SAVINGS: You just saved $655 on a single $1,000 bill.
HSA vs. Traditional Health Insurance
Many business owners ask, "Shouldn't I just buy a standard Blue Cross or Manulife insurance plan?"
For most small businesses (1-5 employees), traditional insurance is a bad deal. Here is why:
| Feature | Traditional Insurance | Health Spending Account (HSA) |
|---|---|---|
| Monthly Cost | Fixed Premiums (Expensive) | $0 (Pay-as-you-go) |
| Coverage Limits | Capped (e.g., $500/year for dental) | Flexible (You set the limit) |
| Pre-Existing Conditions | Often Excluded | 100% Covered |
| "Use it or Lose it" | Yes. Premiums are gone forever. | No. You keep your money. |
With insurance, you pay premiums whether you get sick or not. With an HSA, you only pay when you actually have an expense.
What Exactly Is Covered?
The list of CRA-eligible expenses is massive. It covers things standard insurance often rejects:
- Dental: Checkups, fillings, crowns, implants, orthodontics (Invisalign).
- Vision: Glasses, contact lenses, LASIK surgery.
- Paramedical: Massage (RMT), Chiropractor, Physiotherapy, Naturopath, Acupuncture.
- Prescriptions: Almost all Rx drugs (including fertility drugs).
- Medical Devices: Hearing aids, orthotics, sleep apnea machines (CPAP).
- Mental Health: Psychologist and social worker visits.
How to Set It Up (The Rules)
You cannot simply write a check from your business to yourself and call it an "HSA." That will trigger a tax audit. You must follow the rules:
- Use a Third-Party Administrator (TPA): You must sign up with a provider like Brock Health, Benecaid, or Olympia Benefits. They act as the "referee" to ensure expenses are eligible.
- Incorporation Status (Crucial): HSAs work best for Incorporated Companies. If you are a Sole Proprietor, you typically CANNOT use an HSA unless you have at least one "arm's length" employee (someone who is not your spouse/family). Without this, your deduction limit is severely capped (often at $1,500/year).
- Reasonable Limits: You should set a reasonable annual limit for your class of employees (e.g., $3,000 per year for executives).
Conclusion
If you own an incorporated business in Canada, not having an HSA is like voluntarily donating money to the CRA.
Why struggle to qualify for the measly "Medical Expense Tax Credit" on your personal return (which requires you to spend over 3% of your income to get anything back)?
Switch to an HSA. Treat your family's health as a business expense. It is legal, it is smart, and the savings are immediate.
Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. CRA rules for PHSPs are strict. Improperly set up plans can be deemed "shareholder benefits" and taxed. Always consult with a Chartered Professional Accountant (CPA) to ensure your HSA is compliant with current tax laws.
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